Estimating the Private Value of Financial Statement Statistics; the abstract is below. I hope to have a revised version ready closer to the actual presentation date.

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• Prof. Russell Lundholm (University of British Columbia)
• Thursday 13 June 2024, 13:00-14:00
• W4.05.

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We develop a method for estimating the private value of knowing the future realization of some financial statistic and then apply the measure to the familiar ratios arising from the Dupont decomposition of return on equity. The estimation is grounded in the standard rational expectations model, adapted to accommodate relative risk aversion, and produces an investor’s willingness to pay for the signal. The method can accommodate different levels of investable wealth, multiple assets, and any information system that produces signals about those assets. To illustrate the use of this measure, we show that knowing next year’s return on equity, given that the investor already knows the current value, is worth six times more than knowing the value of next year’s sales growth. And, as predicted by the Dupont model, we find the value of knowing next year’s operating asset turnover depends crucially on the level of the operating profit margin. Finally, we show that knowing next year’s leverage is practically worthless. Given that investors face trade-offs when deciding where to expend effort in financial statement analysis, these estimates can help them to know where to allocate their time.

This talk is part of the Cambridge Finance Workshop Series series.

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